What is sustainable vs green vs transition vs social finance?

2.4 What is sustainable vs green vs transition vs Social finance?

As a relatively new domain, there are currently no universally agreed definitions for “green”, “climate”, “social” and “transition” finance products. At the highest level, there is some consensus around the objectives of each category of finance described in the diagram below:

Sustainable finance is the broadest term, covering a wide range of both social and environmental activities. Firms are commonly using the UN SDGs as a consistent framework through which to describe the objectives of these products. “Climate” or “green” finance is a narrower subset, focused on environmental objectives only. This is the area that has received the most regulatory focus to date, and as a result is both the most mature and common in the market. The “social” and “transition” groupings are the least mature by comparison. Sustainable Finance

Generate a positive impacts for people, planet – or a combination of the two, often using the “ESG” framework and/or aligned to the UN’s Sustainable Development Goals.

Social

Generate positive social outcomes, for example to promote access to healthcare, education, gender or racial equality, decent jobs and fair living wages. Transition

Generate solutions to reduce the emissions associated with carbonintensive activities, or to enable “brown,” activities, to transition to become “green” or “greener.” Climate/Green

Generate positive environmental impacts, for example, through activities that support emissions reductions, biodiversity conservation or restoration.

Increased consumer demand has driven exponential growth in the number of sustainably-branded investment products – with huge increases particularly over 2020-21, when large savings piled up due to global lockdowns. Some of the most common products in the market are listed below:

Investing

“Green” bonds for specific projects/activities e.g. solar, windfarms, etc.

“Blue” bonds for ocean or marine life preservation and/or restoration

Sustainability-linked bonds for general purposes but linked to achievement of specific sustainability outcomes. Frameworks exist for these e.g. Climate Bonds Initiative (Climate Bonds Standard and Certification Scheme), ICMA (Green and Social Bond Principles)

Funds that invest sustainably or impact objectives, e.g. Generation IM, Clim8

Funds that target companies aligning to a certain emissions reduction requirement – e.g. L&G ESG Paris Aligned World Equity Index Fund, Robeco - Paris Aligned Benchmark

Similarly, the gathering momentum behind net zero commitments amongst major global corporations as well as the major global banks that finance them has driven an increase in the availability of corporate lending products geared towards incentivising sustainability outcomes:

Lending

Sustainability-linked loans: multi-stage financing linked to achievement of specific sustainability KPIs e.g. 10.1 billion revolving credit facility for AB InBev, with built-in incentives to improve efficiency, recycle more, use more renewable electricity, and reduce emissions

Sustainable linked Revolving Credit Facilities: linked to specific sustainability or ESG indicators e.g. Dunelm Group’s RCF linked to a range of indicators including emissions/net zero objectives and responsible supply chain objectives

Supply Chain Finance: loans to incentivise certain sustainability objectives across a firm’s supply chain e.g. Walmart’s Project Gigaton in partnership with HSBC

Frameworks exist for dedicated purpose lending e.g. LMA (Sustainability-Linked Loan principles, Green Loan Principles, Social Loan Principles)